ESG equity fund inflows reach $3 billion

The net new capital invested in environmental, social and governance (ESG) equity funds in Australia increased by 338 per cent year-on-year and reached $3 billion in 2021, after the third quarter experience a surge in flows.  

The latest Global Fund Flow Index from Calastone revealed ESG funds were major recipients of Australian income in 2021, after consecutive quarters of negative inflow in 2019 and 2020.

However, the index also showed ESG strategies remained less popular among Australian investors than global investors. UK investors contributed 80 per cent of net flows into equity funds towards ESG strategies, compared to Australia’s 20 per cent.

“Inflows to ESG funds have grown exponentially, following trends we are seeing elsewhere in the world and we expect this to continue in 2022 as economies reopen,” Teresa Walker, Managing Director, Head of Australia and New Zealand at Calastone, said.

“In some markets, ESG equity funds are taking new capital market share from traditionally managed funds, a trend that may begin to feature in Australia’s fund market.

“Nevertheless, the value of ESG funds under management is still dwarfed by traditional categories, so there is a lot of headroom to grow further, which is good news for active fund managers.”

The index revealed traditional or non-ESG funds maintained their stronghold in Australia more than anywhere else around the world. Traditional active funds accounted for 75 per cent of new flows into all kinds of active equity funds in 2021, with active ESG equity funds accounting for the remaining 25 per cent.

While active ESG equity funds made up 90 per cent in the UK, Australia is leading the charge for investing in fixed income funds devoted to ESG strategies.

“ESG funds also tend to invest globally, so the ESG boom in Australia is likely to boost the international diversification of Australians’ savings which have typically favoured domestic investments,” Walker said.

“In 2021, for example, three fifths of ESG cash flowed into global ESG funds, compared to less than half the cash devoted to non-ESG equity funds.”